SITE Research on Whistleblower Rewards, False Reports & Corporate Fraud

2018-01-10

Rewards for whistleblowers – is it an efficient way to detect crimes? Or will it lead to fraudulent reports, making law enforcement costlier and less effective in the end? These questions are at the centre of a heated debate, as US enforcement agencies have been increasingly relying on incentives for corporate whistleblowers, while their European counterparts appear weary of introducing them. SITE Professor Giancarlo Spagnolo, together with Paolo Buccirossi and Giovanni Immordino, try to shed some light on this debate by studying how an effective reward program can be designed.

In “Whistleblower Rewards, False Reports, and Corporate Fraud”, Spagnolo, Buccirossi and Immordino develop a model of the interaction between rewards for whistleblowers, sanctions for fraudulently reporting false or fabricated information, judicial errors, and standards of proof in the two court cases: the one based on a whistleblower’s allegations and the potential follow-up case against a whistleblower accused of reporting false/fabricated information. The model is used to analyze the optimal law enforcement policy under various parameter configurations and efficiency levels of the legal system.

"[...] We show that there is a minimum size of reward, below which whistleblowing will not take place at all."

Spagnolo, Buccirossi, Immordino

One of the findings is that an appropriate balance between the reward offered to successful whistleblowers, the sanctions against whistleblowers convicted for fabricating information, and the courts’ standards of proof, is essential for whistleblower policies to succeed.